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The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for
The Regal Cycle Company manufactures three types of bicycles-a dirt bike, a mountain bike, and a racing bike. Data on sales and expenses for the past quarter follow: Sales Variable manufacturing and selling expenses Contribution margin Fixed expenses: Advertising, traceable Depreciation of special equipment Salaries of product-line managers Allocated common fixed expenses* Total fixed expenses Net operating income (loss) *Allocated on the basis of sales dollars. Total $ 918,000 Dirt Bikes $261,000 Mountain Bikes Racing $ 401,000 Bikes $256,000 481,000 437,000 115,000 146,000 207,000 159,000 194,000 97,000 69,100 8,500 40,200 20,400 43,800 20,300 7,700 15,800 114,900 40,500 38,700 35,700 183,600 52,200 80,200 51,200 411,400 121,500 166,800 123,100 $ 25,600 $ 24.500 $ 27,200 $ (26,100) Management is concerned about the continued losses shown by the racing bikes and wants a recommendation as to whether or not the line should be discontinued. The special equipment used to produce racing bikes has no resale value and does not wear out. Required: 1a. What is the impact on net operating income by discontinuing racing bikes? (Decreases should be indicated by a minus sign.) Contribution margin (loss) Fixed expenses: Total If Racing Current Total Bikes Are Dropped Difference: Net Operating Income Increase or (Decrease) 0 0 0 Total fixed expenses 0 0 0 Net operating income (loss) $ 0 $ 0 $ 0 1b. Should production and sale of the racing bikes be discontinued? Yes O No
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